Competitive forces facing small and medium sized realty enterprises of Vietnam in the context of inflation and economic integration

Development of small & medium-siZed enterprises

The Five Competitive Forces Model of Porter was developed in 1985 with a view to analyzing fundamental competitive forces facing small and medium-sized enterprises
(SMEs) in real estate industry (hereunder referred to as RSMEs for short). Findings have
shown that the existence of RSMEs, previous to 2007, is thanks to open monetary policies,
the collaboration with state-run enterprises and mobilization of citizens’ capital. In the
context of closer economic integration, RSMEs have been menaced by the harsh competition of FDI-supported enterprises. Besides, inflation seems to make the RSMEs go pale
and drawn due to the fact that tight monetary policies have been employed, causing a
rise in investment interest rate and a curb on the credit demand, and accordingly an impediment to the mobilization of deposits. The paper also figures out that the competition
derives from threats from internal factors, customers, suppliers, established rivals, and
the entry of new rivals.
The origin of competitive forces facing RSMEs is from inefficiency of financial instruments in the realty industry, and the lack of collaboration among RSMEs and between
RSMEs and large-sized enterprises. Thus, in order to restrain adverse impacts of competitive forces on RSMEs, the government should establish a legal corridor that can facilitate the birth of appropriate financial instruments for the sake of realty industry,
and stimulate the collaboration between RSMEs and large-sized enterprises and other
sectors.
Keywords: competitive forces, small and medium-sized enterprises in the realty industry (RSMEs), financial instruments for the sake of realty industry.

1. Introduction
the realty industry is deemed as a driving
force behind the economic growth, especially in
newly emerging economies (united nations
Human settlements program, cited in troïng Haø,
2011). in vietnam, realty industry, although a new
economy, has reached a rapid growth over the
past few years. as studied by Gso, the annual average growth of the realty industry in the period
2000-2007 is expressed by the fact that realty enterprises account for 42% of the whole economy,
holding 30% of capital employed and earning a
gross revenue of 24%. However, such the growth
is mainly fostered by rsmes. Counting to 2009,

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Economic Development Review - April 2011

approximately 88% of realty enterprises hold a
capital of smaller than 50 billion dongs (table 1).
like smes of other businesses, smes in realty
industry belong to the private sector. over the
past time, rsmes are much dependent on capital
available in the credit market and customers’ deposits. Yet, when the world economic integration
becomes closer and the monetary policy is tighter
so as to curb inflation, the extant competitive
edges of rsmes seem to be weaker and blander,
exposing them to plenty of competitive forces such
as the entry of new fdi-supported rivals who possess more edges in capital and state-of-the-art
technologies, and a hunger for capital and borrowings (which is caused by macroeconomic goals and

* University of Economics - HCMC


Development of small & medium-siZed enterprises

Table 1: The capital size of realty enterprises in 2009

VND
10bn – 50bn

VND
VND
>VND500bn

50bn – 200bn 200bn – 500bn

Number of realty enterprises

1027

484

115

50

41

1717

As %

60%

28%

7%

3%

2%

100%

Total

Source: Ministry of Construction (2011)

inflation control as set forth in the resolution 11
of the vietnam’s political ministry, that is, pegging the credit debts rate to 16% and credit
growth rate to 20% till the end of 2011 for the
sake of the realty industry).
this paper is to investigate competitive forces
menacing the efficient performance of rsmes and
propose some suggestions for the sake of rsmes
to overcome these threats. However, it is needed
to identify criteria and an analysis framework at
first, then analyze the corporate structure in
terms of size so as to define the role of smes in
realty industry. next, competitive forces of
rsmes will be taken into account on the ground
of aspects given within the analysis framework.
finally, fundamental competitive forces threatening the performance of rsmes will be sorted out
and thereby imply some solutions to these threats.

2. Analysis framework
the definition of smes is different among
countries, yet mainly based on the capital size and
workforce. for vietnam, the definition of smes is
illuminated in the decree 56/2009/nÑ-Cp which
is regarding assistances in the development of
smes. accordingly, any realty enterprises with
the capital size below vnd10bn are treated as
small-sized ones and those with the capital size

from vnd10bn-50bn are medium-sized ones. such
the definition will be employed in the study.
Competitive forces are usually identified by the
porter five forces model which was developed in
1985. in this paradigm, porter figures out five
competitive forces menacing enterprises, that is,
internal threats, suppliers, customers, established
rivals, and the entry of new rivals. this model will
be employed in the research for the sake of
rsmes in the context of economic integration and
inflation as follows: (1) internal threats are to be
analyzed on the basis of capital size, workforce,
value chain, and administration proficiency of

rsmes managers; (2) threats from customers are
due to the fact that the access to the customer’s
realty investments is changeable and the customer confidence in rsmes after the world financial crisis is going down; (3) threats from
suppliers: the access to civil vacant lots and the
supply of finished products from suppliers will be
taken into account; (4) threats from established rivals: changes in the business strategy of largesized enterprises can sharply influence rsmes;
(5) threats from new rivals: the entry of new fdisupported realty enterprises imposes competitive
forces on rsmes. the analysis framework is summarized in figure 1.
figure 1: Competitive forces analysis framework for the case of rsmes in vietnam

3. Database and research methodology
the numerical data employed for analyzing five
competitive forces in smes are collated from the
consensus of Gso in 2000-2009, the housing development strategies till 2020 promulgated in
march 2011 by the ministry of Construction, and
the field research in HCmC-based realty enterprises conducted in december 2010. the descriptive statistical method is employed so as to

identify competitive forces facing rsmes in the
context of closer world economic integration and
inflation.

4. Analyzing competitive forces of RSMEs in
Vietnam
4.1. Internal threats
a. enterprises’ structure in terms of capital size
realty industry is a labor-intensive one.
around 88% of realty enterprises hold the capital
size smaller than vnd50bn as compared to the
95% of the whole economy (see figure 2a). approximately 72% of realty enterprises just employ
nine staff members as compared to the 55% of the
whole economy have the same workforce size (see

Economic Development Review - April 2011

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Development of small & medium-siZed enterprises

figure 2b). With the workforce size of merely nine
staff members, such realty enterprises are just
able to operate as brokerage firms and cannot participate in the supply chain of completed realty
products. this also implies that around 72% of realty enterprises take part in the process of products making.

Figure 2a: Number of enterprises as per the capital
size
Source: Enterprises survey in 2007 & GSO (2010)

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Economic Development Review - April 2011

the capital size of enterprises shows an onward sign in the period 2004-2007, while the
workforce size goes down. figure 3a points out
that the rate of large-sized enterprises in 2007 is
more than that in 2004. Yet, the rate of enterprises with small-size workforce in 2007 is more
than that in 2004 (figure 3b).

Figure 2b: Number of enterprises as per workforce
size


Development of small & medium-siZed enterprises

Figure 3a: Fluctuations in the capital size of
enterprises in 2004 and 2007
Source: GSO, 2010

Figure 3b: Fluctuations in the workforce size of
enterprises in 2004 and 2007

b. participation of rsmes in the value chain
of the realty industry
the business process of realty enterprises can
be divided into three stages, that is, (1) input activities: seeking vacant lots for project development and finished products for redistribution,
executing legal procedures; (2) production activities: seeking contractors, executing the construction and deeds so as to keep the project to
schedule, project quality and costs; and (3) output

activities: seeking customers. these three stages
are generalized from viewpoints of porter (1985),
Krumm (2001), and Hans nelen (2008). this chain
is illustrated in figure 4.

realty enterprise must have more than vnd63bn
on hand to complete this project. this is to say,
rsmes are just able to cover a part in this process
(such as brokerage, dwelling house retailers, etc.)
and hardly participate in the production of finished products.
in practice, many of rsmes have been participating in this production of finished products so
far by employing capitalized capital from customers and the credit market. Yet, when inflation
takes place, this financial instrument is completely paralyzed due to the tight monetary policy,
the high interest rate, and non-production credits.
rsmes are heavily dependent upon the credit

in the event that a realty enterprise would like
to cover these three stages, it is a must for it to
possess a capital size larger than vnd50bn. let
us take following example into account. to build a
10-storey building with the minimum area of
1,500m2, the construction density of 70%, and the
price per square meter of approximately vnd7m,
the gross construction cost is vnd63bn; and the

market due to the fact that instruments for mobilizing capital in the realty market are still limited.
in developed realty markets, besides the credit
market, there are other channels of mobilizing
capital such as realty investment trusts, which are
designed to reduce or eliminate the dependence of

the realty market on the credit market in both
supply and demand side.

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Development of small & medium-siZed enterprises

c. professionalism of rsmes
due to lack of professionalism and proficiency,
the operation of rsmes still heavily depends on
subjective opinions. administrators of rsmes are
often affected by the crowd psychology which can
expose the enterprises to high risks. to restrain
this issue, the vietnam’s ministry of Construction
promulgated some circulars stipulating the practice of realtors; for example, brokerage practitioners must be certificated. Counting to 2009, around
40,000 practitioners have been trained in brokerage and realty price evaluation and around 12,000
practitioners are certificated in realty brokerage.
these courses are designed in a hope of enhancing
skills and ethic of market participants but not fundamental principles of market. When the knowledge of participants in the realty market is still
poor and limited, it is very difficult for them to
foresee drawbacks in future as well as to work out

portunity cost for unofficial investors in the realty
market and the interest charges for realty producers, and thereby forcing producers to keep on mobilizing capital from customers via a depreciation
of realty products. the number of realty sellers
who would like to sell their products quickly but
fear the opportunity cost has been on the onward

trend since the 2007 till now. accordingly, the realty price decreases by 50% after three years, from
2007 to 2010 (marc townsend, 2011).
in addition, because the value of realty products is very high, the prestige of realtors also affects customers’ decisions. according to the
research conducted in HCmC-based realty enterprises in december 2010, the consumer confidence
is influenced by the capital size of realty enterprises with the significance at 1%. table 2 shows
that the smaller the capital size, the lower the
consumer confidence, and vice versa.

Table 2: Consumer confidence in realty enterprises according to the capital size
Capital sizes

Means

Standard deviations

Coefficients of variation

Smaller than VND10bn

2.83

1.65

58%

VND10bn - 50bn

2.69

1.25

46%

VND 50bn - 200bn

3.6

1.58

44%

Over VND200bn

5.04

1.44

29%

Total

3.93

1.83

47%

Statistical significance of the differences among the obtained means: 1%
Source: Author’s survey in December 2010

measures to deal with them.
4.2. Threats from customers
the demand site of the realty market is very
diverse due to diversity in its products. as Khai
(2011) put it, products of the realty market may
be divided into six groups, viz. vacant lots,
dwelling houses, trade centers, offices for lease,
industrial infrastructures, and immovable properties used for amusement parks. However, customers of rsmes mainly buy low-value products
(such as vacant lots and dwelling houses). the capital employed to buy these products mostly comes
from the credit market. Whilst, the system of commercial banks in vietnam is quite thin and sparse,
and instruments that citizens use to access to
credit sources are not diverse (porter, 2010). furthermore, in the context of inflation, the tight
monetary policy is established to increase the op-

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Economic Development Review - April 2011

4.3. Threats from suppliers
suppliers of realty enterprises are those who
supply vacant lots, construction materials, and finished products. rsmes, due to lack of capital,
often resort to small-area lots or those with large
area but disadvantageous location. for construction materials suppliers, rsmes are not their
strategic partners because the frequency of buying
materials of rsmes is not high and rsmes rarely
participate in the product-making process. the relationship between material suppliers and rsmes
is looser in comparison with that between material suppliers and large-sized enterprises (see
table 3).
for suppliers who provide rsmes with finished products, they are large-sized investors and
their major scope of business is not in realty. the

linkage between them and rsmes is just tempo-


Development of small & medium-siZed enterprises

Table 3: The relationship between realty enterprises and suppliers
Means

Standard
deviations

Coefficients
of variation

Smaller than VND10bn

2.83

2.02

71%

VND10bn - 50bn

2.69

1.61

60%

VND 50bn - 200bn

3.6

1.89

53%

Over VND200bn

4.73

1.29

27%

Total

4.09

1.83

45%

Capital sizes

Statistical significance of the differences among the obtained means: 1%
Source: Author’s survey in December 2010

rary and to pave the way for the official participation in the market in future. this can be proven

by the fact that in 2006, many large-sized companies of different sectors, including subsidiaries of
banks, did establish realty enterprises; accordingly, the supply of realty products for rsmes has
been gradually restrained.
4.4. Threats from extant rivals
rsmes primarily suffer competitions with
other rsmes and large-sized enterprises in distribution and access to vacant lots. in terms of distribution, rsmes are very dynamic and quickly
recognize the demand for realty products; yet their
network of distribution is quite limited. it is also
a weakness of vietnam’s rsmes.
advantages in accessing to vacant lots are
often biased against rsmes and in favor of staterun enterprises, including those specializing and
not specializing in realty business (porter, 2010).
previous to 2007, major investors in realty market
were state-run companies who did not specialize
in realty business, and thus they needed to collaborate with rsmes to distribute their finished
products. thanks to that, rsmes can exist and accumulate capital. up till now, many of them have
established realty companies and need not collaborate with rsmes any more in distribution of finished products. that is to say, partners have
turned into rivals of rsmes.
4.5. threats from new rivals
according to unCtad, the ratio of fdi in the
gross capital investments of vietnam increases
from12% in 2006 up to 25.5% in 2007 and 24.1%
in 2008 (porter, 2010). in five recent years, fdi-

supported enterprises attend more to businesses
that need products and services of the realty market, such as hospitality industry, restaurant, construction, retail, manufacture, etc. (see figure 5).
this also explains why the large ratio of foreign
investors in the realty market is placed second
(around 33.8% of the total fdi capital in 2009)
after the hospitality and restaurant industry.

Besides, when the vietnam’s government allows piloting the decree 51/2009/nÑ-Cp which
permits foreign individuals/organizations to acquire dwelling houses in vietnam, the number of
fdi-supported enterprises keep going up in time
to come. this is also a threat to the operation of
rsmes.

Figure 5: The ratio of FDI-supported enterprises in
some sectors in 2009

5. Implications
Competitive forces facing rsmes in the context of inflation and integration are developed on
the ground of the porter five forces model: (1) internal threats: rsmes are mainly in charge of in-

Economic Development Review - April 2011

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Development of small & medium-siZed enterprises

termediary roles and scarcely join the product
making process, and are dependent on the credit
market and customers’ advances. their professionalism and proficiency is not good enough; (2)
threats from customers: the capital structure cannot be kept dependent on customers’ deposits in
the context of inflation, and the consumer confidence in rsmes is low; (3) threats from suppliers: large-sized enterprises usually limit the
supply of finished products to rsmes who will
play as distributors; rsmes mainly resort to civic
vacant lots that have small area and a disadvantageous location; (4) threats from extant rivals:
large-sized enterprises have more advantages in
accessing to vacant lots; the distribution network

is limited, hindering the competitive edges; (5)
threats from new rivals: economic integration
policies have enabled fdi-supported enterprises
to invest in the realty industry in large scale,
menacing the performance of rsmes.

6. Recommendations
the competitive forces facing vietnam’s
rsmes in the context of inflation and economic
integration derive from two gaps, viz. the insufficiency in capitalization instruments and the lack
of linkage among rsmes as well as between
rsmes and other businesses in the realty market.
therefore, in order to work out appropriate solutions to these forces, it is a must to close these two
gaps.
the vietnam’s government had better establish a legal corridor that can facilitate the formation and development of financial instruments for
the sake of the realty industry. in vietnam, besides commercial banks, other channels of capitalization are still limited; thus, it is necessary to set
up channels to capitalize social capitals, such as
realty investment trusts which have been employed and work effectively in many developed
countries.
in addition, it is also needed to facilitate the
linkage between foreign enterprises and local
ones. By doing so, local enterprises, especially
rsmes, will be enabled to access to state-of-theart technologies and kept away from direct competitions as well.
eventually, a supportive mechanism for
rsmes must also be taken into account due to the
fact that the realty industry can make the na-

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Economic Development Review - April 2011

tional economy distinct from others and play as a
springboard for the national economic growth. the
vietnam’s government, in 2009, did promulgate
policies in favor of smes which were applicable
to every sectors. the promulgation of policies in
favor of rsmes alone is to illuminate characteristics of the realty industry, making it a “true” business that can generate jobs, income, and diverse
products for the economyn
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